Division of Retirement Assets
The average 20-something has $10,500 in their 401(k) plan, according to Investopedia and Fidelity. This may not sound like much, but it is by no means inconsequential. And, the older the worker, the larger their retirement account becomes. The average 60-something has over $182,000 in their 401(k) account. Of course, these are averages, not medians (these numbers include those of the super wealthy, which drastically skews the average). Most Americans have far less saved away for retirement, which makes the money they do have even more important to their well-being as they age. The median 401(k) account for 56 to 61-year old Americans is just $21,000, according to CNBC, reflecting three decades of savings. 32 to 37-year olds have about a thousand bucks in their retirement accounts.
Whether you have a lot or just a little saved for retirement, these assets will likely be divided during divorce, or at least count toward community property (one party may keep these assets in exchange for another asset, such as the home). Depending on the type of account that is split during divorce, it will either be divided under a Qualified Domestic Relations Order (QDRO), or a Transfer Incident to Divorce.
Transfer Incident to Divorce For IRAS
Under normal circumstances, moving assets from an IRA could incur a penalty or taxation. However, when it is performed during a Transfer Incident to Divorce, assets from and IRA can be moved without penalty or tax assessment. Any future taxes that must be paid are the responsibility of each party. For example, if the husband is given 50 percent of the assets in his wife’s IRA, he will be responsible for paying the taxes on those assets when he takes them out in 20 years, for example. His ex-wife will not be responsible for taxes on his half.
Qualified Domestic Relations Order (QDRO)
Any retirement account that is not an IRA (such as a 401(k) or 403(b) is filed under a Qualified Domestic Relations Order (QDRO). A QDRO transfer is tax free and has no penalties as long as it is properly reported to the courts. Moreover, the assets that the receiving spouse collects can be transferred into his or her own retirement account or IRA.
Why You Need a Qualified Attorney
By failing to make transfers under a Qualified Domestic Relations Order or Transfer Incident to Divorce, you risk penalties or unnecessary tax consequences by moving around your retirement funds between parties. An attorney will not only ensure that division of assets is fair and equal, but that any division that occurs will not unnecessarily and negatively impact you financially when it comes to taxes and penalties.
Our Experienced San Jose Divorce Attorneys Can Help You Get Started Today
There are many complex aspects of divorce; division of retirement funds is just one of them. To ensure that your divorce and division of assets runs as smoothly as possible, contact our San Jose property division attorneys at Foster Hsu, LLP today at 408-841-7200 for a consultation.
Resources:
cnbc.com/2019/12/12/system-is-flawed-when-most-americans-have-tiny-retirement-savings.html
investopedia.com/articles/personal-finance/010616/whats-average-401k-balance-age.asp#:~:text=401(k)%20Plan%20Balances%20by%20Generation,-The%20good%20news&text=According%20to%20Fidelity%20Investments%2C%20the,from%20%2495%2C600%20in%20Q4%202019.
